Fuel rip-off: Town Council challenged to put their hands to the pump

By KIERAN FINNANE

The Town Council has been challenged to go into the fuel retail business, possibly as a joint venturer. Failing that they should form a collective bargaining group with other regional councils to negotiate a better deal on petrol prices for the community.

So urged Frank Zumbo, Associate Professor of Business Law at the University of New South Wales (pictured at left), for whom a fairer price at the pump around Australia, and especially in the regions, is an enduring research interest.

Invited to speak to council at their committee meeting last night, Prof Zumbo said motorists in Alice, as elsewhere in the regions, are getting “ripped off” by major oil company and retailer price gouging.

“When margins get close to 30 cents a litre at the retail end, you start to think there’s something wrong in the whole process.”

This has a knock-on effect throughout the community, and especially on small business.

There are rip-offs in the metropolitan centres also, but they are greater and more often the case in regional Australia, said Prof Zumbo.

He based his estimation of the rip-off on a comparison of the average notional wholesale price of petrol around the country – 137.7 cents/litre – with the average retail prices in Darwin, Katherine and Alice Springs: these are 154.2, 146.1 and 165.5 respectively.

He surmised that the consistently lower price in Katherine is because the market has effective competition, while the consistently higher prices in Darwin and Alice are due to a lack of competition, with the major oil companies and retailers forming “a cozy club” with a “collective interest” in having their prices and profit margins as high as possible.

The argument that the costs to get fuel here mean that we have to pay a higher price is undone by the Katherine example. If this were the case, their prices would be higher than Darwin’s. Looking at the Katherine example, “you start to realise there is a lot of wriggle room here, there is a lot of fat in those margins”, said Prof Zumbo.

“We need greater transparency across the supply chain. We have fairly good transparency at the retail level [the prices he quoted are publicly available on websites] but we don’t have that level of transparency at the wholesale level.”

The presence of independent competition is critical to lowering prices, said Prof Zumbo.

This is where the council could make a difference.

“Where markets fail there is a proper role for government to intervene in some way … [and] where you have a rip-off the market is failing.”

Council could provide incentives for an independent player to set up in Alice. This could go so far as becoming a joint venturer to minimise that player’s risk.

“You only need one new player that can introduce meaningful competition and you will see lower prices.”

“Fat margins” normally attract competitors but they may be afraid of being ambushed by the established players.

Council could make money through such a venture, he suggested, and save money on its own fuel expenditure. There should be no question of council subsidising the operation with ratepayers’ money.

Alternatively, council could enter into dialogue with like-minded councils about doing some collective bargaining to get a lower wholesale price. Together councils could approach an independent importer: “Councils do have volume which I think independent importers would be interested in”.

If the councils had a tanker that met safety requirements they could buy at the wholesale price.

“I’m sure there’s a business case to be made,” said Prof Zumbo.

He much preferred these possibilities to going down the regulation path (with a regulator setting maximum wholesale and retail prices). Indeed he expressed cynicism about the Australian Competition and Consumer Commission: they “like to watch and watch and watch”, he said.

He has long been calling on them to conduct a national benchmarking study to clarify the situation with respect to wholesale and retail profit margins once and for all. And he has a standing challenge to the ACCC’s petrol commissioner to debate him on these issues, preferably in regional Australia.

If council takes the issue further, he will advise them in any way he can on an honorary basis: “I’m not on the lookout for consultancies … the university pays my wage.”

5 Comments (starting with the most recent)

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Liz Martin

Posted February 16, 2012 at 4:04 pm

I echo Alderman Samih Habib’s sentiments in that Professor Frank Zumbo didn’t really tell us much more than we already knew and some of his ideas were certainly thought provoking. One fact I think was missing from the debate is that many service stations and fuel outlets are in fact small businesses themselves and I for one would not like to see council go into competition with private enterprise. That is not to say I wouldn’t like to see a reduction in the bowser (retail) price of fuel for consumers. In the Northern Territory our economy is especially reliant on fuel prices due to all sorts of factors including long distances, low population density and under-developed alternative energy initiatives; electricity and gas grids and a reduction in fuel prices would be beneficial to all.
All sorts of figures have been bandied around about what the profit margin is for fuel. I have family and friends involved in this industry and can categorically say it is far less than half of the 30c per litre profit margin being bandied around.
While bowser sales represent a massive proportion of turnover in most instances this translates into a very small (if any) percentage of profit. Most fuel retailers rely on selling other goods and services to increase profit margins in their businesses such as cafes, take-away food, automotive products, groceries, tourist maps and souvenirs etc – maybe a good place for a cup of tea Mr. Mayor.
I do support Professor Zumbo’s call for a national benchmarking study. It doesn’t hurt to have that information for all sorts of reasons or to have transparency across the supply chain of any industry that is monopolised by so few key players. However, my preference would be for a full investigation into the governmental taxes and charges levied on fuel (Federally just over .38 cents per litre and whatever the states and territories choose to add) and more importantly how that revenue is expended.
At the moment in Australia expenditure on our ever declining road asset, particularly in regional and remote areas, falls far short of fuel tax revenues taken from the bowser. The Henry Review touches on the fact that fuel tax and other transport taxes are not an efficient or equitable means of financing general government expenditure. I could support the concept of high government imposed fuel taxes if a far larger percentage of that revenue was returned to the improving roads, bridges and other transport related infrastructure that would both reduce Australia’s unacceptably high road trauma and fatality costs in human and financial terms and also offer relief to business and families.
A council operated service station is an interesting concept. We should not close our minds to anything and if a suitable partner makes an approach to council we should judge that on its merits at the time. Fuel prices paid at the bowser are determined by many factors such as hub price in Singapore, cost of rent, wages, transport, amenities etc and of course, an expected profit margin as any business is entitled to have. Council, and indeed any prospective operator, would have to carefully address feasibility, viability and the impact on other business in our community. Interesting concept mentioned in your comments too, that we use our potential sale of fossil fuels to fund a cleaner, greener solar city in Alice Springs. Most automotive organisations and manufacturers around the world are focusing on introducing new vehicles powered by alternative fuels (particularly in the small and family car sector). We should be lobbying for more research and support from governments in that area too and practicing what we preach while we do it.
In short, yes, we need lower fuel prices at the bowser but let’s not target the profit margins of business, lets target the pricing structure from the taxation perspective and lobby for a more equitable and logistical return of those funds to transport related infrastructure and road safety initiatives.
It is unlikely the charges will ever be reduced. Historically Australia has a history of slowly ratcheting these charges upwards so the best we can hope for is to encourage governments to properly implement their own concept of “user pays” and redirect those funds appropriately to roads infrastructure.
Just for curiosity, line up a litre of petrol, a litre of bottled water and a litre of softdrink and consider the huge differences in production costs and influences by international markets out of our control. Think I’ll stick to tap water! Pity my car wont run on it.

Bite … and I thought I was the only one likely to be coming up with the “thought-provoking” ideas of this election campaign!
Alderman Bitar is obviously quite right in his reasoning that Council’s entrance into this market would cause a stir in the private sector – but surely that’s OK from time to time?
Janet – I won’t comment too much on tea parties right now, but I will quote Catherine Douzel and say “Each cup of tea represents an imaginary voyage”.
So … just while we’re taking a broad view of Alice Springs and all the aspects of its wellbeing – let’s not limit the scope of ideas on the table – “capitalist”, “socialist”, “idealist”, “realist” – or whichever blend is one’s preference.
Anyway, whilst there’ll undoubtedly be an ongoing transition period for years to come, oil is, intellectually and ecologically, a sunset industry. Let’s not shy away from looking to, and preparing for, the future now.
In addition to providing relief to the hip-pocket of our average working families, a Council supported fuel outlet would obviously create a new revenue stream that could be strategically directed into the developing the infrastructure of this town’s future (solar energy farms anyone?). If the ACCC, our MLAs or the Feds aren’t prepared to use their power to such effect, then a community must think seriously about its options.
Who knows – if Alice Springs is prepared to boldly lead and consider such a possibility, it could send a strong signal out across this country.

With all due respect, Samih, I think Professor Zumbo is answering your questions with: If no-one else is doing this, we may need to consider doing it for ourselves. Some years ago, whilst holidaying at Streaky Bay, I was surprised to find out that the camping ground we were staying at was set up and run by the local council. I’m sure that if they waited for a private business to do it, they’d still be waiting. Sometimes, we need to think outside the square and seek to change the rules so that we can act outside the limits imposed upon us. What do you think?

They are all out at the same restaurant our mayor is going to. It is called Safe hands. Kieran Finnane did an article titled Alice Springs is safe hands of the public servants. If the break down the word servant: Serv. Short for serving. Ant – a tiny little creature that works day and night till death to serve the Queen. Sorry, that working ant is us, the non govt body. So it must be the drone ant. What is that they do again? That’s right, they are still at that restaurant sipping tea that is called who cares.

Thanks to Prof Zumbo for his time but he never told us anything we don’t know. If the council opened a fuel outlet people may well say the council is competing with private business and that not their job. But where is the ACCC? Where is the Senate? Where are all the MLAs? Where is the the government and its almighty power? Can they take on this legal Mafia? If the law can’t protect us, who will?
Kind regards, Ald Samih Bitar.